Payday loan practices ‘unlikely to improve under new rules’

Rules to improve lending practices by payday loan companies are unlikely to offer greater protection for customers in the near future, consumer rights campaigners have warned.

An updated code of practice announced by the Finance and Leasing Association (FLA) includes limiting the number of times a payday loan can be rolled over to a maximum of three – a move that follows sustained pressure from the government and consumer groups. But the FLA only has one member – Wonga – offering these loans, and critics say more action is needed to stop consumers racking up high levels of debt.

The rules cover short-term loans, often known as payday loans, which offer small amounts of money for a set fee. However, charges mount up if a borrower cannot afford to repay the debt in the agreed period, and those who extend or roll over their borrowing can end up paying annual interest rates of more than 4,000%.

Labour MP Stella Creasy, who is campaigning for the government to introduce a total cost cap on short-term loans, does not believe limiting roll overs will help consumers, and described the FLA’s plans as “tinkering around the edges”.

“What we’ve seen in America is that if you limit roll overs people then pay off the loan and take out another loan straightaway,” she says. “A limit on roll overs will only work if you have a limit on taking out a new loan, say 28 days.”

A spokeswoman for debt advice charity Consumer Credit Counselling Service said it saw “quite a large number of people” who had rolled over loans three times or more, but rather than a limit it wanted to see lenders prevented from rolling over loans at all. She said Dollar Financial, which owns the Money Shop, has already signed up to a code in Canada agreeing to do just that, but still allows roll overs in the UK.

Lenders have been criticised by debt management companies and consumer groups for some of their practices, including racking up huge interest charges and then resorting to the use of debt collectors when customers default.

The FLA, which represents 50 companies offering consumer credit and motor finance, now wants members who offer payday loans to spell out the cost of borrowing before consumers apply, to remind consumers that the loans are designed for short-term borrowing, and to limit roll overs to three.

Fiona Hoyle, head of consumer finance at the FLA, said: “A maximum of three roll overs is allowed, but only if the customer has asked for this and a proper credit assessment has been carried out each time. The code sets additional standards for responsible lending and a cap on roll overs is an essential part of this.”

The Office of Fair Trading is expected to announce a review of the industry at the start of February. But Creasy said lenders seemed to be acting now to show that further statutory regulation would not be necessary.

The Consumer Finance Association (CFA), which represents almost three-quarters of the payday loans market, including high street lenders such as the Money Shop and Cash Converters (which already promises not to roll over loans), said it was also working on an “enhanced code” in collaboration with the Department for Business Innovation and Skills and other trade associations, which it planned to launch later in 2012.

Its chief executive, John Lamidey, said introducing a cap on roll overs could be detrimental to consumers, forcing them to seek credit elsewhere when they reach their limit, but the industry was under pressure “from people who want a simple solution”.

“It may well be that we will bow to political or activists pressure and come up with a number [to limit roll overs], but I’m not sure we will do so in the best interests of consumers,” he said.

He added: “The FLA’s code, while very comprehensive, only regulates one payday lender. The CFA represents a number of the largest short-term lenders in the UK, so our code will reach significantly more consumers.”

Dan McDonald, chief executive of the Medway Citizens Advice bureau, said payday loans should only be used for one-off emergencies. “They certainly should not be rolled over,” he said. “Putting a limit of three on the amount of times a loan can be rolled over won’t make any difference – it just means people can be taken advantage of three times instead of six or seven.”